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EU ministers squabble over strict deficit limits

Juergen Baetz Associated Press

Updated:
06/19/2014 02:00:11 PM EDT

BRUSSELS (AP) — Leading European finance officials clashed Thursday over whether the 18-nation eurozone's budget deficit rules are so strict that they choke off economic growth, and the International Monetary Fund called for the rules to be overhauled.

France, Italy and others who are struggling to meet the fiscal targets are pushing for more flexibility but are facing an uphill battle from the bloc's economic heavyweight, Germany.

"The right rhythm for each of the countries has to be found" in regard to debt and deficit reduction, French Finance Minister Michel Sapin said in Luxembourg.

But German Finance Minister Wolfgang Schaeuble said the existing rules provide sufficient flexibility and insisted that solid public finances and structural reforms will spur growth and job creation.

Eurozone nations have to keep their deficits below 3 percent of gross domestic product and total debt below 60 of GDP. Those not meeting the criteria have to submit plans on how to get their finances back in order to the European Commission, the bloc's executive arm.

The push for more leeway comes as the eurozone is emerging from years of crisis that had threatened the very survival of the currency used by 330 million people. At the heart of the crisis were countries that had amassed so much debt that their borrowing costs spiraled out of control as investors took flight. Facing bankruptcy, five countries needed rescue loans from their European peers.

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To overcome the crisis, a German-led approach prevailed, insisting on savings measures and structural reforms to restore competitiveness and investor confidence. However, with unemployment still stubbornly high in many southern European nations and government borrowing costs falling to new lows, pressure has grown to ease the rules.

In a report on the eurozone economy, the IMF waded into the debate, calling for a simplified fiscal governance structure but strengthened enforcement. It warned the current rules might be so strict as to discourage public investment.

"The system has become excessively complicated," the Washington-based fund said, while lamenting that "compliance with fiscal targets has been poor, reflecting in part weak enforcement mechanisms."

It warned the eurozone not to fall back into full-scale austerity mood in case economic conditions worsen.

The fund's report also called on the eurozone to push ahead with cleaning up its banking sector, strengthening the common bank backstop and implementing structural changes on the national level, including labor market reforms and liberalizing the service sector.

The eurozone debate on financial policy coincides with the tough negotiations on who will be the next president of the European Commission. The bloc's 28 leaders are set to discuss policy priorities for the next Commission at their summit next week. Italy, the eurozone's third-largest economy, reportedly seeks concessions on the budgetary discipline before endorsing a candidate.